What is Current Ratio
The current ratio is a financial ratio that measures a company's ability to pay its short-term debts using its current assets. It is calculated by dividing a company's current assets by its current liabilities.
Current assets are assets that are expected to be converted into cash or used up within one year or less. Examples of current assets include cash and cash equivalents, accounts receivable, and inventory. Current liabilities are debts that are due within one year or less. Examples of current liabilities include accounts payable and short-term loans.
The current ratio is an important financial metric because it indicates a company's liquidity and its ability to meet its short-term obligations. A high current ratio may indicate that a company is in good financial health and has sufficient assets to pay its debts, while a low current ratio may indicate that the company is struggling to meet its short-term financial obligations.
It is important to note that the ideal current ratio will vary depending on the industry in which a company operates. Some industries have higher current ratios than others, and what is considered a "healthy" current ratio may also vary depending on the specific circumstances of a company.
- Liquidity Ratio - A category of financial ratios that includes the Current Ratio, used to measure a company's ability to meet short-term obligations.
- Quick Ratio - Also known as the "acid-test ratio," this is another liquidity ratio that is a more stringent version of the Current Ratio.
- Working Capital - A measure of a company's operational liquidity; Current Ratio is another way to assess this, using Current Assets and Current Liabilities.
- Current Assets - One of the two components in the Current Ratio calculation, representing the company's most liquid assets.
- Current Liabilities - The other component in the Current Ratio calculation, representing obligations to be settled in the short term.
- Balance Sheet - The financial statement where both Current Assets and Current Liabilities are listed, which are used to calculate the Current Ratio.
- Accounts Receivable - A form of Current Asset that may be considered in the Current Ratio, depending on how liquid it is.
- Accounts Payable - A form of Current Liability that is definitely included in the Current Ratio calculation.
- Financial Ratio - The broader category of ratios used for assessing various aspects of a company's performance; Current Ratio is one among them.